What is the Treaty of the United States, Canada and Mexico to Avoid Double Taxation?
As its name indicates, “Avoid double taxation” protects taxpayers from paying taxes twice (in Mexico, United States or Canada) on the same income. To benefit from the Treaty, the taxpayer must prove his residence in the United States or Canada and comply with the applicable legal provisions established by the Mexican Tax Law regarding registration and reporting, as well as the appointment of legal representatives, among others. Take into account the following:
● All rental income is subject to Income Tax (ISR)
● Your residential status is independent of it
● The ISR tax rate is 25% of the gross income earned
● If the rental property is also furnished, in addition to ISR, there is also a Value Added Tax (VAT) or Value Add Tax (VAT)
● The VAT charged to the lessee and paid to the Mexican government by the lessor is an additional 16% tax charged directly to the tenants, or 8% if the Value Added Tax (VAT) is paid to a Mexican company such as Tax Concierge.
What happens if I ignore the tax rules? Will the government take my property?
● The Mexican version of the IRS is the Tax Administration Service (SAT, in Spanish), they have similar practices, both share and compare bank account records. Therefore, the SAT will impose the maximum penalty on all taxes owed, and can even exile or deport the person responsible for the property.
● The Mexican government will take possession and sell the property to obtain the amount owed.
How can I operate in Mexico through an agent but without creating a permanent establishment?
Be sure to:
● Comply with the requirements of Mexican tax legislation to take advantage of the benefits of the Treaty.
● Have a well-written contract with your agent.
● Manage your agency relationship according to the contract terms, as well as develop and maintain documentary evidence that supports the contract terms.
● In general, do not have your agent present you as an extension of your company in Mexico or exercise powers on your behalf except in necessary circumstances.